Does exchange rate depreciation have contractionary effects on firm-level investment?

Jose Maria Serena Garralda and Ricardo Sousa

Working Papers from European Stability Mechanism

Abstract: We assess the conditions under which exchange rate fluctuations are contractionary for firm-level investment. To address this question, we match firm-level balance sheet data with a large dataset of firm-level bonds for about 1,000 firms from 36 emerging market economies over the period 1998–2014. We augment a standard firm-level investment model to control for (country-specific) macroeconomic variables, and interact the effect of an exchange rate depreciation with several dimensions of bond composition, namely: 1) currency of issuance; 2) maturity structure of bonds; and 3) market of issuance. We find that, conditional on the amount of debt issued in foreign currency, an exchange rate depreciation can have a contractionary impact on a firm’s investment spending. We also find that the market of issuance and maturity structure, in particular, when coupled with foreign currency-denominated debt can influence this impact.

Keywords: Investment; exchange rate; balance sheet; bonds; firm-level data; debt (search for similar items in EconPapers)
JEL-codes: E2 E3 F2 F3 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2018-02-21
New Economics Papers: this item is included in nep-cfn and nep-mac
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Citations: View citations in EconPapers (3)

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Working Paper: Does exchange rate depreciation have contractionary effects on firm-level investment? (2017)
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